Is the government preparing an NPS-assured pension?
Is the government preparing an NPS-assured pension?
The government is thinking about guaranteeing a pension that is at least 40–45% of the employee’s final basic pay plus a dearness allowance. It’s anticipated that a conclusion on this issue will be reached prior to the 2018 general elections.
In order to discourage employees from demanding that the previous pension scheme (OPS) be reinstated, the central government is preparing to make significant modifications to the National Pension Scheme (NPS). The government is considering establishing a minimum pension of 40–45% of the employee’s final basic wage plus dearness allowance (DA), according to media sources citing a senior official. It’s anticipated that a conclusion on this issue will be reached prior to the 2018 general elections. But no formal declaration has yet been made public.
Recently, there has been an increase in desire for the previous pension programme to be brought back. In some states’ assembly elections, the revival of the old pension system took the stage. For their government employees, certain states, including Rajasthan, Chhattisgarh, Punjab, and Himachal Pradesh, have already reinstated the previous pension system. In this case, the government’s endorsement of the proposed guaranteed minimum pension in NPS could be very advantageous for the ruling Bharatiya Janata Party in the 2019 general elections. It should be mentioned that the national government has also established a four-member committee to assess the NPS and work on changes in light of the growing opposition to the new pension scheme.
What kind of pension will be provided?
Consider Ramesh Thakur, a worker for the federal government. His basic pay and DA together total one lakh rupees, or one lakh rupees. Ramesh might receive 36,000 rupees in retirement benefits if the government promises a 45% pension. The administration hasn’t provided a thorough justification for this, though.
What is the setup right now?
The National Pension Scheme (NPS) is a government-initiated pension scheme in India that covers employees who began working for the government after April 1, 2004. Under the NPS, both the employees and the government make contributions towards the pension fund, and the returns on these contributions are determined by the market.
Employees who are part of the NPS are required to contribute 10% of their base salary towards the pension fund. This contribution is deducted from their salary and invested in various asset classes such as government bonds, corporate bonds, and equities, based on the employee’s risk profile and investment preferences.
In addition to the employee’s contribution, the government is also obligated to contribute 14% of the employee’s base salary towards the NPS. This contribution from the government aims to provide a substantial portion of the retirement corpus for the employees.
Upon reaching the age of 60, NPS members can withdraw up to 60% of their accumulated retirement fund corpus as a lump sum, which is tax-free. This means that 60% of the accumulated corpus can be taken out by the member without incurring any tax liability. However, the remaining 40% of the corpus must be utilized to purchase an annuity from a life insurance company.
An annuity is a financial product that guarantees a defined amount of periodic payments to the individual. The annuity purchased with the 40% corpus must provide a regular income to the NPS member. The amount of pension received under this plan is not fixed or guaranteed, as it depends on various factors such as the annuity provider, prevailing interest rates, and the chosen annuity option.
It’s important to note that the NPS operates on a defined contribution basis, where the final pension amount is dependent on the accumulated corpus and the annuity purchased. Unlike traditional pension plans, there is no fixed or guaranteed pension amount for NPS members.
The NPS aims to provide a sustainable pension system for employees, allowing them to accumulate a substantial retirement corpus through regular contributions and market-linked returns. It offers flexibility in terms of withdrawal options, allowing individuals to take out a portion of their corpus as a lump sum and providing a regular income stream through the purchase of an annuity.
The NPS encourages individuals to plan for their retirement by actively participating in building their pension fund. It provides them with the opportunity to benefit from market performance while ensuring a steady income stream during retirement. However, as the returns are market-linked, the final pension amount may vary depending on market conditions and investment performance.
Overall, the NPS offers a structured and transparent pension system for employees, with contributions from both the employees and the government, market-based returns, and flexible withdrawal options. It aims to provide individuals with a reliable income source during their retirement years, although the final pension amount is not guaranteed and depends on the accumulated corpus and annuity choices made by the member.
